In October 2010, Stanford University graduates
Kevin Systrom
and
Mike Krieger
launched a new iPhone application, Instagram, yet another oddly named tech start-up in a crowded field of hopefuls.

On Monday, the two twenty-somethings said they sold their photo-sharing service—which has about a dozen employees and no revenue—to Facebook Inc. for $1 billion in cash and stock.

Facebook is acquiring the popular photo-sharing app Instagram for $1 billion in cash and stock. The deal would rank as Facebook's largest to date. Don Clark has details on the News Hub. Photo: Getty Images

That 18-month journey underscores the frenzied state of the tech investing game, where even the smallest Web companies can develop global followings in a matter of weeks.

Only last week, Instagram closed a $50 million funding round from venture capital firms. The company's valuation: A whopping $500 million.

Incredibly, such a number would turn out to be paltry in the days ahead. Shortly after that deal, Facebook Chief Executive
Mark Zuckerberg
contacted Mr. Systrom, Instagram's 28-year-old CEO, to buy the company.

Mr. Systrom came up with the idea for Instagram and is the company's largest shareholder with about a 45% stake, said people familiar with the matter.

The two had spoken about a deal the previous summer, according to other people familiar with the matter.

The acquisition came together over the weekend. "It was all Mark," said
Steve Anderson,
a founding partner of Baseline Ventures, one of the company's early investors. "It was CEO to CEO."

ENLARGE

Facebook's Rise

Buying Instagram improves Facebook's mobile offerings while removing a rival for users' attention. Instagram, with more than 30 million registered users, grew rapidly by helping people share photos, a fundamental reason people use Facebook.

The deal is the largest ever for Facebook, which people familiar with the matter say will sell shares to the public in May. The company in the past has paid millions of dollars for a series of small ventures, primarily in an effort to acquire talent.

Mr. Zuckerberg called the deal a "milestone" for his company. But, he said, "We don't plan on doing many more of these, if any at all."

Facebook is acquiring Instagram for $1 billion in cash and stock in what is the social network's biggest acquisition to date, Dennis Berman reports on Mean Street. Photo: Getty Images.

Instagram is one of a cohort of young start-ups that have built products around the iPhone and have registered incredibly fast growth in a short period of time. The company bills its service as a fun and quirky way to share photos with friends. A user can snap a photo with an iPhone, then choose a filter to transform the look of the shot, say by giving it the look of an old Polaroid.

Users can share the photos with followers, where they can post comments and "Like" recommendations. Some people describe the app as a visual version of Twitter, where it is heavily used to share photos.

On March 11, Mr. Systrom gave a keynote talk at the South by Southwest conference in Austin and announced that Instagram's count of registered users had nearly doubled since December, rising to 27 million from 15 million. Last week, the company launched a version of its application that works on smartphones running
Google
Inc.
's Android system and instantly added millions of users.

ENLARGE

All this growth hasn't yet translated to revenue. But in the lingua franca of today's social-media industry that doesn't matter as much as user engagement and the ability to access those users' personal data.

Facebook has about 845 million users, many of whom came to the service to share photos. The company has been falling behind in mobile and has let Instagram capture much of the buzz in photo sharing. The company has rarely changed its photo feature, even as newer companies built more sophisticated apps.

Photos are a key driver of user "engagement," or how long someone spends on Facebook. Users spend an average of 7.5 hours a month on the site, according to research firm ComScore, the highest of any social network.

Those numbers matter to Facebook's marketers, who want users to view advertisements and interact with brands on the site. Advertising accounts for 85% of Facebook's revenue, or $3.1 billion in 2011, up from $1.8 billion a year earlier, according to the company's regulatory filings.

Facebook is acquiring the popular photo-sharing app Instagram for $1 billion in cash and stock, Spencer Ante reports on digits.

But the company has to capitalize on mobile. It only began in February to sell limited advertising on its mobile site, despite the fact that about half of its membership uses Facebook on their mobile phones.

Instagram has yet to develop a model for generating revenue, and substantial obstacles remain, such as whether small smartphone screens are sufficient to draw advertisers' attention.

Ann Taylor owner
Ann
Inc.,
Urban Outfitters
Inc.
and fashion label
Marc Jacobs
have created accounts and use Instagram to promote their brands. The app is also popular with celebrities and politicians who have created accounts, including singer Justin Bieber, President Barack Obama, professional skateboarder Tony Hawk and rapper Snoop Dogg. Last year,
Apple
named Instagram the iPhone app of the year.

The value of Facebook's purchase of Instagram could prove to be worth it if it opens the door to China, the world's fastest-growing market. The WSJ's Deborah Kan speaks to Hong Kong Digital Editor Jake Lee.

The Instagram deal harkens back to Google's $1.6 billion acquisition of video-sharing site YouTube in 2006. At the time, analysts questioned the hefty price tag. But the deal instantly made Google a leader in Internet video and allowed it to expand its advertising to new formats.

In early 2011, Instagram raised $7 million in venture capital from Benchmark Capital, Baseline Ventures, Lowercase Capital and a handful of early-stage investors in a round that valued the company at about $30 million, said people familiar with the matter.

The new company almost immediately drew interest from suitors.

Twitter reached out to the company to express interest in buying it in 2011, people familiar with the matter said. Last summer, Mr. Systrom took a meeting with Mr. Zuckerberg, who floated the idea of a sale to Facebook, the people said.

Messrs. Systrom and Kreiger rebuffed all of the offers and seemed intent on building an independent company, said people familiar with their thinking.

Mr. Zuckerberg convinced Mr. Systrom that Instragram would be stronger under the Facebook umbrella than operating as an independent player.

He told Mr. Systrom that Instragram would function as an independent company under Facebook—a promise that Mr. Zuckerberg had never made to any other acquisition targets.

—Emily Glazer contributed to this article.

Corrections & Amplifications An earlier version of a photo caption in this article incorrectly reversed the identifications of Instagram founders Mike Krieger and Kevin Systrom. Mr. Krieger is on the left and Mr. Systrom is the right.

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